Scourge of the loan sharks

They charge interest at a staggering 150,000%, fail to pay and they'll turn to intimidation, brutality and sexual assault. As the recession bites, illegal money lenders or 'loan sharks', are making a kiling.

Desperate: Debra Hicks

Dawn on Wednesday and a dozen trading standards officers and policemen clad in stab-proof body armour surround a semi-detached property in the suburbs of Liverpool. It's a relatively affluent neighbourhood and as they hammer on the door the curtains twitch along the street until a burly, tattooed man dressed only in his boxer shorts opens up.

A warrant is produced and the sleep-befuddled man lets in the officers. They're investigators who specialise in the crime of illegal money lending - and they've had a tip-off that their target is a notorious loan shark.

The squad is carrying out similar raids once a week up and down the country. In the coming months, their workload is set to explode. Due to the credit crunch, mainstream lenders have withdrawn loans, tightened lending criteria and hiked interest charges. Now, as Britain heads deep into recession, only the most credit-worthy customers are welcome.

Those shut out are not just the unemployed or the very low-paid. Figures suggest that as many as ten million Britons no longer have access to High Street loans, so risk-averse have the banks and building societies become. But plenty of lenders are prepared to fill this void - and they are charging terrifying rates of interest.

Loan sharks, the name given to unlicensed money lenders, offer cash on extortionate terms. Borrow £300 and you face an annual percentage rate of charge (APR) between 8,000 and 12,000%. APRs of 150,000% are not unheard of. (In contrast, Barclaycard is offering a 'classic' credit card with an APR of 19.9%.)

But worse than the financial pain, the loan sharks routinely resort to intimidation and violence to ensure the 'terms' of their loans are met. Broken bones and sexual assaults are common, and such are the levels of intimidation that borrowers have even taken their own lives. Yet it is not just the illegal lenders who are set to benefit from the explosion in debt. Businesses offering no-questions-asked loans are springing up everywhere. There are those dependent on post-dated cheques linked to pay-days, those that take car logbooks as security, and an ever-growing army of doorstep lenders who turn up once a week to collect their payments. While licensed and legal, these lenders also offer shockingly high APRs - 400% plus is common.

There are even companies willing to 'help' those struggling with mortgage payments by buying houses and then renting them back. It sounds good in practice, but the reality is often very different. Instead of a home for life, the vendors find themselves homeless and in more debt than ever. Such is the threat posed by the illegal loan sharks that even the official charged with hunting them down is wary of revealing his full name.

'They really do make people's lives a misery,' says Tony, whose team of Trading Standards loan-shark busters is based in Birmingham and whose area of operation covers much of England. They like to see themselves as doing service to the community, but the reality is that they are the scourge of it. They drain and terrorise the community - illegal lenders enforce payment with the threat of violence or violence itself. They hit people with baseball bats or cut them with machetes.'

So why would anyone put themselves at such risk? First, they are often desperate and have nowhere else to turn. 'If you are on a low income and the washing machine packs up, that is a big expense,' explains Tony. 'People panic and often turn to friends for advice. He or she, trying to help, may suggest they get in touch with a loan shark. 'The friend may have borrowed from him before and if they have paid back their loan may think of him as an allright person. Loan sharks are everyone's best friend - as long as they get what they want.'

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A loan shark does not worry about credit history or paperwork. The loan is legally unenforceable and they won't be relying on the courts to get their money back. A borrower who takes £200 may be expected to hand back £400 within ten weeks, at a rate of £40 a week. Failure to pay will see the loan increased, after which threats and intimidation will begin. Julie, whose name has been changed to protect her identity, used a loan shark after losing her job. She borrowed £300 and had to repay £680.

She made the first four payments, but missed the next two. The loan shark immediately demanded an extra £300. 'I told him it wasn't fair,' the woman in her 20s says. 'But he just said he didn't care and that I had to pay him.' Julie managed to scrape together £700 from family and friends. She gave it to the loan shark, hoping that would be the end of the loan. But he demanded more. When she refused, he ordered her to hand over her gold jewellery. When this was not forthcoming, he attacked her.

'He grabbed me round the throat and then lifted me off the sofa until I was eye to eye with him,' she says. 'I didn't know what he was going to do. He was squeezing harder and harder.' Only when a friend who was in the room called the police did he release Julie, throwing her against a wall and breaking a rib. The police became involved, but the threats continued until Julie moved house. But the loan shark has not forgotten her. 'He told my friends it may be five years, it may be ten or 15, but he will find me and scar me for life,' she says.

While it is estimated that 165,000 households in the UK are affected by illegal money lending, repaying approximately £120m a year, many more borrow from other sources. These may be legal, but have also come in for criticism for their high rates of interest. Home-collected or doorstep loans, where repayments are picked up by an agent, have grown in popularity. And, as the experience of 41-year-old Debra Hicks demonstrates, people from a wide range of social backgrounds are resorting to them.

'When I borrowed from a doorstep lender, it was supposed to be a temporary loan to buy the children presents for Christmas,' she explains. 'But I wish I had never begun, as I am trapped in a nightmare circle of debt that I can't break out of - however much I try.' At face value, one imagines Debra would have no difficulty in securing a High Street loan. She works as a hospital ward assistant and is married to Ian, 43, a supervisor with the local council. They live in a five-bedroom house in Taunton, Somerset, and have eight children, aged 19 months to 24 years.

'Although Ian and I work hard, we have a £255,000 mortgage and money has always been tight,' she says. A few years ago, Debra was visiting a friend when an agent from legal loans firm Greenwoods dropped by the lender explained it, it all seemed so straightforward,' she says. 'I borrowed a couple of hundred pounds and had to pay it back at £10 a week. There was very little form-filling, and to have the cash that same day was fantastic.'

Although Debra cannot recall what APR she was charged, anyone borrowing £200 from Greenwoods today would typically be expected to pay back £320 at £10 a week - an APR of 280%. 'To be honest,' says Debra, 'I was so desperate for the money it wouldn't have mattered how much it cost to pay back.' The repayments were made as agreed, but then the agent offered her an additional £500. 'She said I could pay off my existing loan with the new loan. The rest was for me,' she says. 'Of course, it was borrowing to pay off borrowing, but having that cash in my hand was just so tempting.'

Since then, Debra's older children have taken out similar loans and now, as a family, they owe about £2,000. 'I don't know exactly how much we owe,' she says. 'I can't face up to the truth about how much debt we are in. We should be paying back around £150 a week, but we simply cannot afford it. Sometimes if we hear the rep coming up the drive, I tell the children to hide and be quiet. She will ring the doorbell for about 15minutes before giving up.

'It is not because I don't want to pay - but some weeks money is so tight that if I paid the lender, I wouldn't have food for the babies. I feel bad about it, but also I feel angry that companies charge such high interest. It is preying on vulnerable families like ourselves.' She adds: 'I imagine most people think people who use such lenders live in council houses and are on benefits. But we are proof that you can work hard, own your home and fall into credit problems.

'I have been amazed at the friends who have admitted using money lenders. But most are just too ashamed to admit it, and that is why they get away with charging so much interest.' Greenwood, which loaned the money to Debra, is part of Provident Financial - or the Provvy, as it is widely known. The downturn has seen its business boom.

Provident reported a pre-tax profit of £51.3m for the first six months of 2008, up 13% on last year - and it has more than 1.6m customers and a 12,000-strong army of agents who collect door to door. It argues that the charges it levies are a fair reflection of the risk it takes in granting loans to people with poor credit histories.

Chief Executive Peter Crook recently explained: 'We think it's a fair price for the risk. We don't offer teaser rates, we don't do free gifts, we don't do loyalty programmes or 0% balance transfers. We're very clear that this is the price. We don't bring people in under false pretences.' That may be the case, but in practice what it means is that those who can least afford it pay most.

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Consider, for example, another type of loan - the car logbook loan. One company visited by the Daily Mail was offering loans with an APR of 321%. The loans work as follows. The company offers the cash equivalent of 50% of the trade-in value of your car. It then takes the logbook, MOT certificate and insurance certificate - while the borrower keeps the car.

The loan can be repaid over any period from 13 to 50 weeks. A £1,000 loan, with repayments over 24 weeks, will result in weekly repayments of just under £65. That means borrowers will be paying back £1,560. But struggle to keep up the payments and they will take the car and charge administration costs covering overdue payments, trace and recovery, repossession, storage and sale.

While eye-watering, at least the details of the loan are there in black and white. That's more than can be said for the loan sharks and for a number of companies involved in another increasingly popular way of raising cash - the sale-and-rent-back game. These firms operate by buying houses from hard-up homeowners and then renting them back to them. The idea is that they give you cash in exchange for a stake in your property.

That's the theory. But as Jean and Michael Turner discovered, they don't always play fair. In 2004, the couple, both in their 50s, had a £60,000 mortgage on their four-bedroom terrace house in Norwich. But when Michael, a window cleaner, became ill they began to struggle with their £500-a-month repayments. Faced with repossession in 2006, they were put in touch with Reading-based company Home Assured Ltd.

A representative visited and persuaded them to sell the house for £100,000 - £20,000 less than its market value. The firm paid off the £60,000 mortgage, charged the Turners £20,000 to cover the costs of the transaction - and handed over the remaining £20,000 equity, only when housing charity Shelter became involved. To stay in the house, the Turners had to pay Home Assured rent of £500 a month.

If that wasn't bad enough, the house was sold on by Home Assured to a second individual. He continued to take the rent - but defaulted on his mortgage. As a result, the house was repossessed last March, and the Turners, whose marriage has broken up through the stress, were made homeless and forced to move into council accommodation.

'I lived in that street all my life,' Mrs Turner says. 'I had hoped to live there until I died. Everything has been taken from me. I know people will think we were stupid, but we were desperate.' She adds: 'I want to warn other people to be careful - these type of people prey on the vulnerable.' While Home Assured Ltd, a company with a reputation for shoddy treatment, appears no longer to be trading, in the months and years to come the financially vulnerable won't go away. Indeed, their numbers are set to grow as fast as the interest on a loan shark's loan.

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